SEC News Digest

Issue 2012-175 September 10, 2012

Rules and Related matters

Exemptive Order

An order was issued granting an application of iShares, Inc. and iShares MSCI Frontier 100 Fund an exemption from Rules 101 and 102 of Regulation M pursuant to Rules 101(d) and 102(e) of Regulation M, and Exchange Act Rule 10b-17 pursuant to Exchange Act Rule 10b-17(b)(2). Publication is expected in the Federal Register during the week of September 10. (Rel. 34-67804)

The Commission is publishing for public comment the Public Company Accounting Oversight Board's proposed new Auditing Standard No. 16, Communications with Audit Committees (PCAOB-2012-001). Publication of the proposed rule is expected in the Federal Register during the week of September 10, 2012. The comment period will end 21 days after the proposed rule is published in the Federal Register. (Rel. 34-67807)

Enforcement Proceedings

In the Matter of JP Turner & Company, LLC, and William L. Mello

On September 10, 2012, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions (Order) against JP Turner & Company, LLC (JP Turner) and William L. Mello (Mello). The Order finds that JP Turner and Mello, as President of the firm, failed reasonably to supervise three registered representatives with a view to preventing and detecting their violations of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. Specifically, the Order finds that JP Turner and Mello failed reasonably to supervise three registered representatives of the firm who, between January 1, 2008 and December 31, 2009, “churned” the accounts of seven customers for the purpose of generating commission business. Consequently, these customers paid approximately $845,000 in commissions, fees and margin interest to JP Turner, and the firm retained approximately $200,000 of this amount.

The Order finds that during the relevant period, Mello, as President of JP Turner, was ultimately responsible for establishing the firm’s supervisory policies and procedures, as well as a system to implement these policies and procedures designed to prevent and detect the churning violations. The Order finds that although JP Turner had a monitoring system to identify actively traded accounts, the system imposed few requirements on, and no meaningful guidance for supervisors in terms of reviewing these accounts and taking meaningful action to investigate the trading activity.

Based on the above, the Order censures JP Turner and imposes against JP Turner disgorgement of $200,000 plus prejudgment interest of $16,051 and a civil penalty of $200,000. In addition, the Order imposes certain undertakings, including the obligation by JP Turner to hire an independent consultant to review its written supervisory policies and procedures. The Order also suspends Mello from association in a supervisory capacity with a broker, dealer or investment adviser for a period of five months and imposes a civil penalty of $45,000. JP Turner and Mello each consented to the issuance of the Order without admitting or denying any of the findings in the Order.

In a related matter, the Commission announced today that it instituted unsettled administrative and cease-and-desist proceedings against three former JP Turner registered representatives, Ralph Calabro, Jason Konner, and Dimitrios Koutsoubos, alleging that they churned customer accounts, and against Michael Bresner, JP Turner’s Head of Supervision, alleging that he failed reasonably to supervise two of those registered representatives. (Rel. 34-67808; IA-3460; File No. 3-15014)

In the Matter of Michael Bresner, Ralph Calabro, Jason Konner, and Dimitrios Koutsoubos

On September 10, 2012, the Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940 (Order) against Michael Bresner (Bresner), Ralph Calabro (Calabro), Jason Konner (Konner) and Dimitrios Koutsoubos (Koutsoubos)(collectively, Respondents). The Division of Enforcement (the “Division”) alleges that Calabro, Konner, and Koutsoubos, who were registered representatives of JP Turner & Company, LLC (JP Turner), a registered broker-dealer based in Atlanta, Georgia, fraudulently “churned” the accounts of seven customers at the firm. The Division further alleges that Bresner, JP Turner’s Head of Supervision, failed reasonably to supervise Konner and Koutsoubos with a view to preventing and detecting their violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Specifically, the Division alleges that between January 2008 and December 2009, Calabro, Konner, and Koutsoubos churned the accounts of the defrauded customers by engaging in excessive trading for their own gains in disregard of the customers’ conservative investment objectives and low or moderate risk tolerances for the purpose of generating commission business. Their misconduct generated commissions, fees, and margin interest totaling approximately $845,000, while the defrauded customers suffered aggregate losses of approximately $2,700,000. During the relevant period, Calabro engaged in churning the accounts of three customers while Konner and Koutsoubos each engaged in churning the accounts of two customers.

The Division further alleges that Bresner failed reasonably to supervise Konner and Koutsoubos, who generated sufficiently high commissions for some of their churned customers such that the firm’s procedures required that Bresner personally review the underlying trading. For such accounts, Konner and Koutsoubos each engaged in trading activity that far exceeded the “frequency of trades” identified in two of the customers’ account documents associated with active trading. Additionally, the file for one of Koutsoubos’ customers lacked the required account documents associated with active trading. Despite these and other red flags, Bresner took no meaningful action to investigate or prevent the churning.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Respondents with an opportunity to dispute these allegations, and to determine what sanctions, if any, are appropriate and in the public interest. The Order requires that the administrative law judge issue an initial decision no later than 300 days from the date of service of the Order.

In a related matter, the Commission announced today that it instituted settled administrative proceedings against JP Turner and the firm’s President, William L. Mello, for failing reasonably to supervise registered representatives of JP Turner who churned customer accounts. The Order in that proceeding finds that Mello, as President of JP Turner, was ultimately responsible for establishing the firm’s supervisory policies and procedures, as well as a system to implement these policies and procedures designed to prevent and detect the alleged churning violations. The Order finds that although JP Turner had a monitoring system to identify actively traded accounts, the system imposed few requirements on, and no meaningful guidance for supervisors in terms of reviewing these accounts and taking meaningful action to investigate the trading activity. JP Turner and Mello each consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rels. 33-9359; 34-67810; IA-3461; IC-30197; File No. 3-15015)

In the Matter of Joseph S. Blimline

On September 10, 2012, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 as to Jospeh S. Blimlline.

The Division of Enforcement alleges that Joseph S. Blimline (Blimline), from June 2006 through January 2009, acted as an unnamed principal and was known as the “Chief Operating Officer,” and the head of the land management division of Provident Royalties, LLC (Provident), a Delaware limited liability company which was not registered with the Commission. Blimline also acted as an undisclosed and unlicensed principal or affiliate of Provident Asset Management, LLC, a Delaware limited liability company which was registered with the Commission as a broker-dealer from March 9, 2004 until March 18, 2010. During this time, Blimline was involved in raising funds through a series of Provident fraudulent offerings which purported to be exempt from registration pursuant to Rule 506 of Regulation D. In this capacity, Respondent acted as an unregistered broker-dealer in violation of the federal securities laws.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Blimline an opportunity to respond to those allegations, and to determine what sanctions, if any, are appropriate and in the public interest. The Order directs the administrative law judge to issue an initial decision within 210 days from the date of service of the Order Instituting Proceedings. (Rel. 34-67821; File No. 3-15016)

On September 10, 2012, the Securities and Exchange Commission filed an enforcement action in federal court in Boston charging Massachusetts-based Bio Defense Corporation and others for their roles in a fraudulent offering of unregistered Bio Defense securities. The defendants are charged with defrauding investors through various misrepresentations and schemes while raising at least $26 million in investor funds.

In addition to Bio Defense, the Commission’s complaint charges Michael Lu of Lexington, Massachusetts, the founder and former CEO and Chairman of Bio Defense; Jonathan Morrone of Newton, Massachusetts, a former Senior Executive Vice President of Bio Defense; Z. Paul Jurberg of Brookline, Massachusetts, a senior officer of Bio Defense and most recently a Senior Vice President of Sales and Marketing; Anthony Orth of Tustin, California, a former Vice President of Marketing for Bio Defense; and Brett Hamburger of Delray Beach, Florida, a consultant to Bio Defense who raised investor funds for the company. The Commission also named May’s International Corporation, an entity controlled by Michael Lu, as a relief defendant based on its receipt of investor funds.

According to the Commission’s complaint, filed in the United States District Court for the District of Massachusetts, Bio Defense, which purports to develop, manufacture and sell a machine for combating the use of dangerous biological agents through the mails, and its principals began engaging in unregistered offers and sales of securities to investors in the United States by at least 2004 and, after attracting the attention of various domestic state regulators in 2008, began utilizing “boiler room” firms to assist in selling shares of Bio Defense securities to overseas investors primarily in the United Kingdom.

The Commission’s complaint alleges that, while making unregistered offers and sales of securities to US investors from at least 2004 through August 2008, Lu, Morrone, and Jurberg made false claims to investors that Bio Defense was not paying financial compensation to its employees and officers. The complaint further alleges that these individuals gave potential investors the false impression that Bio Defense preserved its cash assets by having employees who worked for no, or very little, pay, suggesting that these employees were working solely or primarily for “sweat equity” shares, which might later become valuable when the company became profitable or underwent an initial public offering of stock. In fact, Bio Defense’s largest expense during those years was the money it paid to Lu, Morrone, and Jurberg and other employees from funds raised from investors; in 2004 alone, Bio Defense paid approximately $1 million in compensation to its officers and employees.

The Commission’s complaint further alleges that, as Bio Defense began raising money overseas in August 2008, the defendants transformed the company into a deceptive and fraudulent device designed to enrich its principals while also paying as much as 75% of investor proceeds as commissions to its overseas boiler room fundraisers. From August 2008 through approximately July 2010, Bio Defense’s most substantial source of cash generation and most significant expense was not manufacturing and selling machines, but instead was its securities promotion and sales activities. Bio Defense and its representatives did not tell investors that 75% of funds received from them would be going straight to boiler room operators.

The Commission alleges that all defendants violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder; that Bio Defense, Lu, Morrone, Jurberg and Orth violated Sections 5(a) and 5(c) of the Securities Act; and that Lu, Morrone, Jurberg, Hamburger and Orth violated Section 15(a)(1) of the Exchange Act. The Commission also alleges, in the alternative, that Lu and Morrone are liable under Section 20(a) of the Exchange Act as control persons of Bio Defense for Bio Defense’s violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. The SEC seeks in its action permanent injunctions, disgorgement plus prejudgment interest, civil penalties, and, against Lu, Morrone, Jurberg and Orth, officer and director bars.

The Commission acknowledges the assistance of the Massachusetts Securities Division, the UK Financial Services Authority and the City of London Police in this matter.

Self-Regulatory organizations

Approval of Proposed Rule Change

The Commission approved a proposed rule change (SR-FINRA-2012-026) filed by Financial Industry Regulatory Authority, Inc. pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to the handling of stop and stop limit orders. Publication is expected in the Federal Register during the week of September 10. (Rel. 34-67778)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.